Learning Objectives

By the end of this lesson you will be able to:

• Identify the primary financing options available to real estate investors
• Explain the key terms of a mortgage: principal, interest rate, amortization, LTV, and points
• Compare conventional, FHA, VA, and portfolio loan options
• Describe creative financing strategies including seller financing and private money
• Calculate the impact of financing terms on cash flow and total return

Core Content

Why Financing Matters

The financing structure of a deal can determine whether a property cash flows, whether you can qualify for the loan, and what your actual return on investment is. Two investors buying the same property at the same price can achieve dramatically different results based on their financing.

Mastery of financing is not optional for real estate investors. It is the mechanism that turns a single property into a portfolio.

Key Mortgage Terms

Before evaluating any loan, understand these terms:

Principal — the amount borrowed

Interest Rate — the annual cost of borrowing, expressed as a percentage

APR (Annual Percentage Rate) — the total annual cost including fees, expressed as a percentage. Higher than the stated interest rate.

Loan-to-Value (LTV) — the ratio of the loan to the property's appraised value

• 80% LTV = 20% down payment
• Higher LTV = more leverage, higher monthly payment, often higher interest rate

Points — upfront fees paid to the lender. 1 point = 1% of the loan amount. Paying points typically reduces the interest rate ("buying down the rate").

Prepayment Penalty — a fee charged if the borrower pays off the loan early. Common in commercial loans and some portfolio loans.

DSCR (Debt Service Coverage Ratio) — as covered in Lesson 5, lenders require this to be above 1.20–1.25 for most commercial loans.

Primary Loan Types

Conventional Loan (Primary Residence)

• Requires 3–20% down for primary residence
• Best rates for high credit score borrowers
• Owner must occupy for at least one year if using primary residence terms
• Fannie Mae/Freddie Mac guidelines apply

• Requires only 3.5% down with 580+ credit score
• Higher mortgage insurance premium (MIP) than conventional PMI
• Available for 1–4 unit properties if owner-occupies one unit (house hacking)
• Seller can contribute up to 6% toward closing costs

• Available to eligible veterans, active duty, and surviving spouses
• No down payment required
• No private mortgage insurance
• Among the best financing available if eligible

• Requires 20–25% down for investment property
• Higher interest rate than primary residence loans
• Limited to 10 financed properties per borrower (Fannie Mae guideline)

• Lender holds the loan on their own books rather than selling to Fannie/Freddie
• More flexible underwriting
• Higher interest rates and fees than conforming loans
• No 10-property limit
• Useful for investors building large portfolios

• For properties with 5+ units or commercial use
• Underwritten based on property income (DSCR), not primarily borrower income
• Terms typically 5–25 years
• Often includes balloon payments at end of term
• Amortization may be 25–30 years with a 5–10 year balloon

• Short-term, asset-based lending (6–18 months typical)
• High interest rates (10–15%+) and points
• Designed for fix-and-flip or bridge financing
• Faster approval than conventional
• Not suitable for long-term hold investments

Creative Financing

Beyond traditional loans, experienced investors use:

Seller Financing (Owner Carryback) The seller acts as the lender. The buyer makes payments directly to the seller rather than a bank. This can be negotiated at:

• Lower interest rate than market
• Lower down payment
• Flexible terms
• No formal lender qualifying

Subject-To The buyer takes ownership of the property while leaving the existing mortgage in place. The buyer makes mortgage payments but the loan remains in the seller's name.

Significant legal and ethical considerations apply. This strategy requires proper legal counsel.

Private Money Loans from individuals (friends, family, private investors) rather than institutions. Terms are negotiated directly. Can be faster, more flexible, and cheaper than hard money.

BRRRR Strategy (Buy, Rehab, Rent, Refinance, Repeat) An acquisition strategy that uses a renovation to force appreciation, then refinances out the invested capital:

1. Buy a distressed property at a discount
2. Renovate to increase value and rent
3. Rent at market rate
4. Refinance at the higher appraised value
5. Use the cash-out refinance proceeds to fund the next acquisition

Impact of Financing on Cash Flow

Example comparison for a $200,000 property with $1,800/month gross rent:

Estimated NOI (50% Rule): $10,800/year

Intelligent Use of Leverage

Leverage amplifies returns in rising markets. It amplifies losses in declining markets.

Principles for intelligent leverage:

1. Cash flow first. Do not use leverage to acquire properties that do not cash flow. Leverage on a negative-cash-flow property creates monthly losses.
2. Leave reserves. Never put 100% of available capital into a down payment. Keep 3–6 months of expenses per property in reserve.
3. Match loan term to hold strategy. Long-term holds warrant fixed-rate, long amortization loans. Short-term renovations can use hard money or bridge financing.
4. Watch balloon payments. Commercial loans with 5-year balloons require refinancing or sale within that window. Ensure you have a plan.
5. Scale gradually. Most successful portfolios are built one or two properties at a time, not through rapid leveraged expansion.

Application

For a property you have been analyzing:

1. Determine which loan type you would most likely qualify for given your situation
2. Calculate the monthly mortgage payment at 25% down, 7% interest, 30-year amortization
3. Compare cash flow at 25% down vs. 30% down
4. What is the minimum down payment at current market interest rates that produces positive cash flow on this property?